Foreign institutional investors, or FIIs, were net buyers of Indian equities yet again during the quarter-ended December 2014, despite Indian equities trading at a significant premium to other emerging markets. India-focused offshore funds and ETFs registered net inflows of $1.9 billion in the fourth quarter of 2014, a record level since 2010. Below are the key highlights on performance and flows of funds investing into India.
Asset flows of India-focused offshore funds and ETFs
- India-focused offshore funds and ETFs registered total inflow of $2.5 billion in 2014, of which offshore ETFs made up the largest chunk, bringing in about $2.45 billion, while inflows through India-focused offshore equity funds were a meagre $47 million.
- Contrastingly, over the fourth quarter, India-focused offshore equity funds brought in about $1.2 billion out of the total inflows of about $1.9 billion, compared with $700 million of inflows from ETFs. The popularity of these funds despite their higher expense ratios, compared with ETFs indicates foreign investors have a clear preference for active management over passive exposure.
- Assets of India-focused offshore equity funds and ETFs increased in the fourth quarter to about $41 billion from $38.3 billion at the end of the third quarter. ETFs made up about $9 billion of these assets, while $32 billion was in the form of India-focused offshore funds.
How the funds performed
- India-focused offshore equity mutual funds and ETFs delivered an average return of 3.2% (in USD terms) during the quarter, outperforming the US dollar-denominated MSCI India USD index, which fell by 0.7%.
- Banking was the favourite sector among investors as expectations of interest rate cuts boosted growth prospects. Other cyclical sectors such as capital goods and autos also delivered better returns than the broader market. Among sectors that declined, oil and gas and metals suffered the most on persistent weakness in commodity prices.
- For the year 2014, JPMorgan India Smaller Companies USD and Kotak India Mid Cap A USD Acc were the best performing offshore funds. WisdomTree India Earnings ETF, which follows a "strategic beta" approach, outperformed the MSCI India USD index by 5.9% for the year.
Allocation to India
- Allocations to Indian equities by foreign funds rose during 2014. Emerging market funds increased their weighting to 10.9% in 2014 from 8.3% in 2013, while that for Asia/Asia-Pacific funds rose to 12.6% from 9.9%. Global funds increased their allocation to Indian equities to 2.2% in 2014 from 1.5%.
- Global funds were the most significant contributors to inflows into the Indian equities, bringing in a total of $15.7 billion in 2014, of which $9.5 billion came in during the fourth quarter. Emerging market funds brought in a total of $4 billion, while Asia/Asia-Pacific funds brought in $1.9 billion.
